Select Committee on Public Accounts Thirty-First Report


INLAND REVENUE: EMPLOYER COMPLIANCE REVIEWS

INTRODUCTION AND SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

  1. The Inland Revenue (the Department) carry out compliance reviews to check that employers are properly calculating income tax and national insurance contributions in respect of their employees and are paying over to the Department the amounts due. In 1995-96, the Department received some £105 billion from around 1.2 million employers. This sum represented over 75 per cent of the total tax and national insurance contributions collected by the Department in that year and accounted for a substantial proportion of the public finances.

2. On the basis of a report by the Comptroller and Auditor General,[1] the Committee took evidence from the Department on the management of this aspect of their work, including their arrangements for detecting non-compliance and the measures taken to help and encourage employers to comply with the law. Our examination focussed on the identification of non-compliant employers; the conduct of investigations; the promotion of voluntary compliance, including the use of penalties; and action being taken to minimise the administrative burden on business. Since our examination, the Government have announced that the Contributions Agency, which carries out similar work to check whether employers are complying with national insurance legislation, will be transferred to the Inland Revenue from April 1999.[2] This will enable businesses to deal with one organisation about the tax and national insurance contributions they collect from their employees and should help ease the burdens of compliance.

3. Employer compliance reviews provide vital assurance that the PAYE system is operating as intended and that employers are reporting expenses and benefits taxable under Schedule E. In recent years, the reviews have become increasingly successful. On the basis of the Committee's examination, however, it is clear that the Department could improve them further by:

  • making more effective use of information technology, since, although employer compliance reviews have existed in some form or other since 1947, staff still lack access to a national database of employers to help them target those trades and employers most likely to be non-compliant and to help them plan and carry out their work cost-effectively;

  • making better use of their management information to establish why some compliance teams seem to be more efficient and effective than others; and why, for example, the average yield per member of staff varied from a little over £100,000 in South West Region to over £300,000 in North West Region.

These improvements would provide assurance that employers were being treated equitably and that this important work was being carried out cost effectively to common standards.

4. Our more specific conclusions and recommendations, which underpin the general views above, are as follows:

On the identification of non-compliant employers

    (i) The Committee is concerned at the wide disparity in the success of the Department's Local Employer Compliance Units, which review smaller businesses, in identifying non-compliant employers. In Scotland, for example, the proportion of compliance reviews where an irregularity was detected ranged from under 40 per cent to over 90 per cent. The Department have set up a review to look into these differences, and we look to them to implement recommendations on best practice (paragraph 16).

    (ii) We also expect the Department to exercise close oversight over their Regional Offices' work to monitor such variations in performance, and we expect them to take prompt corrective action where these differences are due to shortcomings in the way Units select and conduct cases (paragraph 17).

    (iii) In spite of a successful trial with a simple employer database in two of their Local Employer Compliance Units which yielded increased tax of £315,000 in one Unit (139 per cent) and £132,000 (50 per cent) in the other, compared with a 25 per cent increase nationally, the Department decided that extending the database to all Units would have conflicted with their information technology strategy and would have diverted staff from higher priority work. We consider that the Department should have examined a lot more thoroughly the costs and benefits of extending the database, pending the introduction of their new employer compliance computer system, and in particular the potential loss of tax from not doing so (paragraph 18).

    (iv) The Department argued that a great deal of any tax that might have been lost from not extending the simple database to all Units could be recovered later because they might identify the same employer for review in the future and recover unpaid tax for earlier years. In our view, however, this remains to be demonstrated, and we consider that the database could still have been a worthwhile interim measure with a significant payback in terms of additional tax yield (paragraph 19).

    (v) It is disturbing, especially in the light of the Department's decision not to extend the experimental database, that their new employer compliance computer system will not be fully effective until around 2001, that costs have increased by some £5 million, and that net savings are now around £1 million less than originally anticipated (paragraph 20).

    (vi) It is also surprising that the Department's business case for the new employer compliance computer system did not include at least a broad estimate of the amount of additional yield that might be expected. The Committee recognises the difficulty of making such estimates, but expect the Department to include them wherever possible in future investment appraisals (paragraph 21).

    (vii) The Committee is concerned at the potential loss of tax, possibly £6 million in 1995-96, resulting from unproductive referrals from the Contributions Agency. We note the recent decision to transfer the Contributions Agency to the Inland Revenue and expect the Department to use the new opportunities provided by the transfer to build on the work currently being carried out by both organisations to improve the quality of referrals and increase the tax yield (paragraph 22).

On the conduct of investigations

    (viii) The Department's National Audit Groups, which review larger businesses, achieved a return of £12 for every £1 spent in 1995-96, twice that of their Local Employer Compliance Units. The Committee welcomes the Department's decision to review the respective approaches of the Groups and Units and expects the Department to ensure that the initiatives being taken to encourage the exchange of information and best practice are implemented as soon as possible (paragraph 30).

    (ix) Benefits taxable under Schedule E amounted to over £7 billion in 1994-95. In view of the potential amount of tax at risk from non-compliance, it is unsatisfactory that, until January 1998, some 13 years after Schedule E reviews began, there were no standard checks for this aspect of employer compliance work. The Committee expects the Department to put in place appropriate quality assurance arrangements to ensure that the checks are carried out (paragraph 31).

    (x) Given the importance of employer compliance work, we are concerned that the staff who do it are not required to sit examinations after their training. The Committee therefore welcomes the Department's decision to consider the introduction of examinations for new reviewing officers once training is sufficiently settled to be tested (paragraph 32).

    (xi) The Department have responded positively to staff suggestions for improving training following the National Audit Office survey of Units. The Committee looks to the Department to act upon suggestions where it is clear that worthwhile improvements are possible (paragraph 33).

On the promotion of voluntary compliance

    (xii) Educational visits to new employers by employer compliance staff have not proved cost-effective and the Department have now appointed local business advisers to be the first point of contact for such employers. The Committee welcomes the Department's initiatives to develop new approaches to providing advice in response to employers' views and looks to the Department to monitor the success of these arrangements and to take remedial action as necessary (paragraph 43).

    (xiii) The Department have identified a number of areas where irregularities by employers are common. We look to the Department to focus their educational efforts on these areas and to monitor their impact on improving employer compliance (paragraph 44).

    (xiv) In 1995-96, staff in the Department's East Region were more than twice as likely to impose a penalty than those in Northern Ireland, and staff in South West Region imposed a financial penalty twice that imposed by staff in Scotland. These variations in the frequency and level of penalties are disturbing. The Department are taking various initiatives to secure greater uniformity, including the issue of revised guidance to staff and the provision of additional training. The Committee expects the Department to monitor closely the impact of these measures and to take further action as necessary to secure consistency (paragraph 45).

    (xv) Penalties were imposed in only one in 10 reviews where unpaid liabilities were found, and the average rate of the penalty was only 14.6 per cent of the maximum that could be levied. The Committee is concerned that the infrequent use of penalties and their relatively low value may send the wrong signals to employers who fail to meet their tax obligations. We therefore look to the Department to take a consistent and strong approach to the imposition of penalties to encourage compliance (paragraph 46).

On minimising the administrative burden on employers

    (xvi) The Department began merging PAYE and Schedule E reviews in April 1994 but they do not plan to assess the effectiveness of the new arrangements until 1999-2000 because of lack of data. It is surprising that, after nearly four years, the Department do not have sufficient experience of combined working to form a considered view of its strengths and weaknesses. We believe an earlier review might have been beneficial (paragraph 53).

    (xvii) The Government's decision to establish a single organisation to deal with both income tax and national insurance contributions offers the opportunity to secure a significant reduction in the administrative burden on employers. We look to the Department to continue also to explore the scope for further co-operation with Customs and Excise (paragraph 54).

    (xviii) It is unsatisfactory that the Department have not reviewed the balance of staff across regions for 10 years and have no plans to do so before 1990-2000. We expect the Department to ensure that, in future, the deployment of staff is reviewed more regularly to ensure fair and equal treatment of employers (paragraph 55).


1  C&AG's report (HC51 of Session 1997-98) Back

2  Financial Statement and Budget Report (HC620 of Session 1997-98), paras 4.46-4.47 Back


 
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